Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Securities Exchange Act of 1934 and the Securities Act of
1933, which are subject to risks and uncertainties. The forward-looking
statements include statements concerning, among other things, our business
strategy (including anticipated trends and developments in, and management plans
for, our business and the markets in which we operate), financial results,
operating results, revenues, gross margin, operating expenses, products,
projected costs and capital expenditures, research and development programs,
sales and marketing initiatives and competition. In some cases, you can identify
these statements by forward-looking words, such as "may," "might," "will,"
"could," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"predict," "intend" and "continue," the negative or plural of these words and
other comparable terminology.

The forward-looking statements are only predictions based on our current
expectations and our projections about future events. All forward-looking
statements included in this Quarterly Report on Form 10-Q are based upon
information available to us as of the filing date of this Quarterly Report on
Form 10-Q. You should not place undue reliance on these forward-looking
statements. We have no obligation to update any of these statements. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity, performance
or achievements to differ materially from those expressed or implied by these
statements. These factors include the matters discussed in the section titled
"Risk Factors" in our Annual Report on Form 10-K for the year ended December 28,
2013 and elsewhere in this Quarterly Report on Form 10-Q. You should carefully
consider the numerous risks and uncertainties described under these sections.

The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the accompanying notes contained
in this Quarterly Report on Form 10-Q. Unless expressly stated or the context
otherwise requires, the terms "we," "our," "us" and "FormFactor" refer to
FormFactor, Inc. and its subsidiaries.

Overview

We design, develop, manufacture, sell and support precision, high performance
advanced semiconductor wafer probe card products and solutions. We are the
largest probe card manufacturer, and semiconductor manufacturers use our wafer
probe cards to perform wafer sort and test on semiconductor die, or chips, prior
to wafer singulation. We work closely with our customers on product design, as
each wafer probe card is a custom product that is specific to the chip and wafer
designs of the customer. During wafer sort and test, a wafer probe card is
mounted on a prober and electrically connected to a semiconductor tester. The
wafer probe card is used as an interface to connect electrically with and test
individual chips on a wafer. Using our wafer probe cards to test at this stage
of the manufacturing process, our customers can reduce their cost of test by
identifying defective chips prior to incurring the time and costs of packaging
defective chips. We work closely with our customers on product design, as each
wafer probe card is a custom product that is specific to the chip and wafer
designs of the customer. We operate in a single industry segment and have
derived substantially all of our revenues from the sale of wafer probe cards
incorporating our proprietary technology.
Historically, sales for wafer probe cards for testing Dynamic Random Access
Memory, or DRAM, devices have made up the majority of our revenues. In October
2012, we completed the acquisition of Astria Semiconductor Holdings, Inc.,
including its subsidiary Micro-Probe Incorporated (together "MicroProbe"). The
majority of MicroProbe's revenue is made up of sales of wafer probe cards for
testing System-on-Chip, or SoC devices.
Revenues for the three months ended March 29, 2014 increased 6%, or $3.3
million, as compared to the corresponding period in the prior year. For the
three months ended March 29, 2014, our revenues increased approximately 13% in
our SoC products, increased 1% in our DRAM products and decreased approximately
5% in our Flash memory products, as compared to the corresponding period in the
prior year.

We incurred a net loss of $12.7 million in the first three months of fiscal 2014
as compared to a net loss of $19.8 million in the first three months of fiscal
2013. The decrease in net loss is primarily attributable to our ongoing cost
reduction and restructuring efforts as well as increased revenues.

Our cash, cash equivalents and marketable securities and restricted cash totaled
approximately $144 million as of March 29, 2014, as compared to approximately
$152 million at December 28, 2013. The decrease in our cash, cash equivalents
and marketable securities balances was primarily due to the use of cash for
operating activities in the first fiscal quarter of

2014. We believe that we will be able to satisfy our working capital
requirements for at least the next twelve months with the liquidity provided by
our existing cash, cash equivalents and marketable securities. If we are
unsuccessful in increasing our revenues, improving our operating efficiency,
reducing our cash outlays or increasing our available cash through financing,
our cash, cash equivalents and marketable securities will decline in future
fiscal years.

We believe the following information is important to understanding our business,
our financial statements and the remainder of this discussion and analysis of
our financial condition and results of operations:

Revenues. We derive substantially all of our revenues from product sales of
wafer probe cards. Revenues from our customers are subject to fluctuations due
to factors including, but not limited to, design cycles, technology adoption
rates, competitive pressure to reduce prices, cyclicality of the different end
markets into which our customers' products are sold and market conditions in the
semiconductor industry. Historically, increases in revenues have resulted from
increased demand for our existing products, the introduction of new, more
complex products and the penetration of new markets. We expect that revenues
from the sale of wafer probe cards will continue to account for substantially
all of our revenues for the foreseeable future.

Cost of Revenues. Cost of revenues consists primarily of manufacturing
materials, payroll, shipping and handling costs, manufacturing-related overhead
and amortization of certain intangible assets. Our manufacturing operations rely
upon a limited number of suppliers to provide key components and materials for
our products, some of which are a sole source. We order materials and supplies
based on backlog and forecasted customer orders. Tooling and setup costs related
to changing manufacturing lots at our suppliers are also included in the cost of
revenues. We expense all warranty costs and inventory provisions as cost of
revenues.

We design, manufacture and sell custom advanced wafer probe cards into the
semiconductor test market, which is subject to significant variability and
demand fluctuations. Our wafer probe cards are complex products that are custom
to a specific chip design of a customer and must be delivered on relatively
short lead-times as compared to our overall manufacturing process. As our
advanced wafer probe cards are manufactured in low volumes and must be delivered
on relatively short lead-times, it is not uncommon for us to acquire production
materials and start certain production activities based on estimated production
yields and forecasted demand prior to or in excess of actual demand for our
wafer probe cards. We record an adjustment to our inventory valuation for
estimated obsolete and non-sellable inventories based on assumptions about
future demand, past usage, changes to manufacturing processes and overall market
conditions.
Research and Development. Research and development expenses include expenses
related to product development, engineering and material costs. Research and
development costs are expensed as incurred. We plan to continue to invest in
research and development activities to improve and enhance existing product
technologies and to develop new technologies for current and new products and
for new applications.

Selling, General and Administrative. Selling, general and administrative
expenses include expenses related to sales, marketing, administrative personnel,
internal and outside sales representatives' commissions, market research and
consulting, and other sales, marketing, administrative activities, amortization
of certain intangible assets, and provision for doubtful accounts. These
expenses also include costs for protecting and enforcing our intellectual
property rights and regulatory compliance costs.

Impairment of Long-Lived Assets. Asset impairment charges include charges
associated with the write-down of assets that have no future expected benefit or
for assets that have been determined to be impaired as well as adjustments to
the carrying amount of our assets held for sale.

Revenues for the three months ended March 29, 2014 increased 6%, or $3.3
million, as compared to the corresponding period in the prior year. For the
three months ended March 29, 2014, our revenue increased approximately 13% in
our SoC products, increased 1% in our DRAM products and decreased approximately
5% in our Flash memory products, as compared to the corresponding period in the
prior year. The overall increase in revenues was primarily driven by higher unit
volume in the SoC wire bond product market. Smart phone and tablet DRAM demand
increased in the three months ended March 29, 2014 compared to the corresponding
period in 2013 and was partially offset by reduced demand for personal computing
commodity DRAM. The slight decrease in Flash memory revenue was primarily in the
NAND Flash memory area resulting from reduced demand for our TouchMatrix product
in the three months ended March 29, 2014.

(1) Asia-Pacific includes all countries in the region except Taiwan,
South Korea, and Japan, which are disclosed separately.

Geographic revenue information is based on the location to which we ship the
customer product. For example, if a certain South Korean customer purchases
through their North American subsidiary and requests the products to be shipped
to an address in Asia-Pacific, this sale will be reflected in the revenue for
Asia-Pacific rather than North America.

The increases in North America and Europe revenues for the three months ended
March 29, 2014, when compared to the same period in 2013, were driven by
increased SoC product shipments for both flip chip and wire bond applications.
The decrease in Taiwan revenues for the three months ended March 29, 2014, when
compared to the same period in 2013, was driven by a combination of decreased
SoC product shipments and a decrease in mobile phone and tablet-based DRAM and
Flash demand. The increase in South Korea revenues for the three months ended
March 29, 2014 when compared to the same period in 2013 was primarily due to
increased mobile processor-based SOC product shipments. The increase in Japan
revenues was driven by higher demand for both SoC wire bond products and our
SmartMatrix DRAM product.

The following customers accounted for more than 10% of our revenues for the
periods indicated:

Gross profit fluctuates with revenue levels, product mix, selling prices,
factory loading, and material costs. For the three months ended March 29, 2014,
the amount of gross profit increased compared to the same period in the prior
year, primarily due to lower material costs, lower labor expenses and overhead
charges as a result of our cost reduction initiatives and favorable production
yields. Our net inventory provision charges remained relatively flat between the
three months ended

March 29, 2014 and the corresponding period in the prior year. For the three
months ended March 29, 2014, the value of previously reserved materials that
were used in manufacturing and shipped was $0.8 million.

Gross profit included stock-based compensation expense of $0.5 million for the
three months ended March 29, 2014 and March 30, 2013, respectively.

Future gross margins may be adversely impacted by lower levels of product
revenues, even though we have taken significant steps to reduce our operating
cost structure. Our gross margins may also be adversely affected if we are
required to record additional inventory provision charges and inventory
write-downs if estimated average selling prices of products held in finished
goods and work in process inventories are below the manufacturing cost of those
products.

Research and development expenses for the three months ended March 29, 2014
decreased by $1.2 million compared to the same period in the prior year as a
result of our ongoing cost reduction and restructuring efforts which were
primarily comprised of a reduction in our headcount and stock compensation
expense of approximately $0.6 million and $0.4 million, respectively. As a
percent of revenues, research and development expenses decreased 3.4% during the
three months ended March 29, 2014 from the comparable period of the prior year.

Stock-based compensation expense included in research and development expenses
was $0.6 million for the three months ended March 29, 2014 compared to $1.0
million for the three months ended March 30, 2013.

Selling, general and administrative expenses for the three months ended
March 29, 2014 decreased by $2.4 million compared to the same period in the
prior year as a result of our ongoing cost reduction and restructuring efforts
which were primarily comprised of a reduction in our integration and headcount
expense of approximately $1.0 million and $0.7 million, respectively.
Additionally, our overall travel and general operating expenses decreased by
approximately $0.6 million compared to the same period in the prior year. As a
percent of revenues, selling, general and administrative expenses decreased
approximately 5.9% during the three months ended March 29, 2014 from the
comparable period of the prior year.

Stock-based compensation expense included within selling, general and
administrative expenses was $1.5 million for the three months ended March 29,
2014 compared to $1.5 million for the same period in the prior year.

For the three months ended March 29, 2014, restructuring charges decreased by
$2.0 million from the comparable period of the prior year. Our restructuring
activities are discussed below.

2014 Restructuring Activities

On January 27, 2014, we announced a global organizational restructuring and cost
reduction plan (the "Q1 2014 Restructuring Plan"). As part of the plan, the
Company eliminated 52 full-time employees. In addition, we reduced our temporary
workforce by 9 positions. We recorded $2.0 million of restructuring charges
during the first fiscal quarter of fiscal 2014, which was comprised of $1.4
million in severance and related benefits and $0.6 million in impairment charges
for certain equipment that would no longer be utilized. We expect to realize
about $2 million in savings per quarter beginning in the second quarter of
fiscal 2014.

The liabilities we accrued represent our best estimate of the obligations we
expect to incur and could be subject to adjustment as market conditions change.
The remaining cash payments associated with our various reductions in workforce
are expected to be paid by the end of the second fiscal quarter of fiscal
2014. As such, the restructuring accrual is recorded as a current liability
within 'Accrued liabilities' in the Condensed Consolidated Balance Sheets.

2013 Restructuring Activities

In the first fiscal quarter of fiscal 2013, we implemented a restructuring plan
(the "Q1 2013 Restructuring Plan") which resulted in the reduction of our global
workforce by 31 employees across the organization. In addition we reduced our
temporary workforce by approximately 20 positions. We also suspended development
activities and engineering efforts for our next generation DRAM Matrix platform
and terminated development activities for a certain SoC product platform. We
recorded
$4.0 million of restructuring charges during the first fiscal quarter of fiscal
2013, which was comprised of $1.3 million in severance and related benefits and
$2.7 million in impairment charges for certain equipment that would no longer be
utilized. The activities comprising this restructuring activity were completed
in fiscal 2013.

During the three months ended March 29, 2014, we recorded an impairment charge
of $0.7 million related to certain manufacturing assets which will no longer be
utilized.

Management believes it is reasonably possible that additional impairment charges
that would further reduce the carrying amounts of our property, plant and
equipment and intangible assets may arise in fiscal 2014 if we are unable to
achieve cash flows anticipated by our forecasted financial plan.

Interest income is primarily earned on our cash, cash equivalents and marketable
securities. The decrease in interest income for the three months ended March 29,
2014 as compared with the same period of the prior year was primarily the result
of lower average balances. Cash, cash equivalents, restricted cash and
marketable securities were $144.4 million at March 29, 2014 compared to $151.5
million at December 28, 2013, and $154.0 million at March 30, 2013. The
weighted-average yield on our cash, cash equivalents and marketable securities
for the three months ended March 29, 2014 and March 30, 2013 was 0.17% and
0.31%, respectively.

Other income (expense), net is comprised primarily of foreign currency impact
and various other gains and losses. The change in other income (expense), net
for the three months ended March 29, 2014 compared to March 30, 2013 was due
primarily to foreign currency exchange losses and a patent litigation settlement
paid in the three months ended March 30, 2013.

We recorded an income tax provision of $0.3 million for the three months ended
March 29, 2014 as compared to an income tax benefit of $0.2 million for the
three months ended March 30, 2013. Income tax provisions reflect the tax
provision on our non-U.S. operations in foreign jurisdictions and the tax
benefit from the lapsing of the statute of limitations in US and foreign
jurisdictions. We continue to maintain a valuation allowance for our U.S.
Federal and state deferred tax assets.

We classify interest and penalties related to uncertain tax positions as part of
the income tax provision. For the three months ended March 30, 2013, we
recognized an interest and penalty benefit of approximately $0.1 million. As of
March 29, 2014 and March 30, 2013, we have accrued total interest and penalties
of $0.2 million and $0.2 million for each of the respective periods related to
the uncertain tax positions.

We anticipate that we will continue to record a valuation allowance against our
U.S. and certain non U.S. deferred tax assets. We expect our future tax
provisions, during the time such valuation allowances are recorded, will consist
primarily of the tax provision of our profitable non-U.S. jurisdictions.

Our effective tax rate may vary from period to period based on changes in
estimated taxable income or loss by jurisdiction, changes to the valuation
allowance, changes to Federal, state or foreign tax laws, future expansion into
areas with varying country, state, and local income tax rates, deductibility of
certain costs and expenses by jurisdiction.

Liquidity and Capital Resources

Capital Resources: Our working capital was $175.5 million at March 29, 2014 and
$173.9 million at December 28, 2013. The increase in working capital in the
three months ended March 29, 2014 was primarily due to an increase in accounts
receivable due to increased sales as compared to the three months ended December
28, 2013 and the reclassification of our long-lived assets to current assets as
assets held for sale.

Cash and cash equivalents consist of deposits held at banks, money market funds,
U.S. government securities and commercial paper that at the time of purchase had
maturities of 90 days or less. Marketable securities consist of U.S. government
and agency securities and commercial paper. We typically invest in highly-rated
. . .